Founders' Agreements: What Must Be Agreed in Writing

Founder conflict is among the most common causes of startup failure, and among the most preventable. Its absence also surfaces at the first due diligence: an investor finds a company where no one can establish who owns what and why.

1. How it differs from the articles of association

The articles are a registered statutory document governing the company's relationship with third parties and its basic rules.
The founders' agreement is a private contract among the partners regulating their relationship with each other in detail the articles typically can't accommodate.

The two documents must be consistent. Conflict between them is a source of dispute, and what is registered statutorily will usually prevail. Review them together, not separately.

2. Equity split

The core principle: split on future contribution, not on who brought the idea. The idea is worth little compared with five years of execution.

Factors to weigh: full-time commitment or otherwise, capital contributed, expertise critical to the activity, and personal risk assumed (leaving a job, for instance).

Watch two dangerous extremes: a dramatically lopsided split produces an unmotivated partner; and a perfectly equal split agreed to avoid a difficult conversation may conceal the absence of any real agreement about roles, producing deadlock when views diverge.

3. Vesting

The single most important clause in the agreement. Ownership is earned over time in exchange for continued work — the common formula is four years with a one-year cliff before anything vests.

The purpose isn't distrust; it's protecting whoever stays. A founder who leaves after six months holding a third of the company makes it uninvestable, and burdens the remaining founders with building value for someone who left.

Investors typically require it, and it's better to have arrived there first.

4. Roles, authority, and decision-making

• Who does what? With titles and a clear scope of responsibility, not "we'll work on everything together."
• Which decisions require unanimity? Selling the company, admitting a partner, borrowing above a threshold, changing the business.
• Which decisions does each founder take alone within their scope, without reference?
• Deadlock mechanism: what happens when views are tied in a two-founder company? Leaving this unaddressed produces total paralysis.

5. Personal obligations

• Commitment: is it full-time? From when? And what applies to someone temporarily holding another job?
• Confidentiality: a continuing obligation extending beyond the partnership.
• IP assignment: an express undertaking that everything a founder produces relating to the company's activity belongs to the company. This clause is among the most heavily scrutinised at investment.
• Non-compete and non-solicitation: drafted with reasonable time and scope limits; excessively broad drafting can be difficult to enforce.

6. Departure of a partner

A scenario that must be written in advance, because it occurs in a meaningful share of companies:

• Voluntary departure: what happens to vested and unvested interests?
• Termination for cause: material breach or proven default — and "cause" must be defined precisely, not generally.
• Incapacity or death: transfer of interests and the rights of heirs.
• Valuation and buyback mechanism: how is the interest valued on repurchase? Better to fix the method in advance than the figure.
• Pre-emption rights for partners before an interest is offered to third parties.

7. Dispute resolution

Specify in writing: the governing law, the competent forum, and whether mediation or arbitration is required before litigation. Settling this in advance reduces cost and time if a dispute arises.

Common mistakes

• Relying on a verbal understanding between friends.
• No vesting.
• Failing to define "cause" precisely in termination provisions.
• Omitting the IP assignment clause.
• Ignoring the deadlock scenario in a two-founder company.
• Conflict between the agreement and the articles.
• Copying a foreign template without adapting it to local law.

Checklist

• Equity split based on future contribution
• Vesting with a cliff
• Defined roles and scope of responsibility
• A list of decisions requiring unanimity
• A deadlock mechanism
• Commitment and confidentiality undertakings
• Express IP assignment
• Departure provisions and a valuation method
• Dispute resolution mechanism
• Full consistency with the articles of association
• Independent legal review

FAQ

Do I need one with only two of us?
Especially then. A two-founder company is the most exposed to deadlock when views diverge.

When should it be signed?
As early as possible, and at incorporation at the latest. Deferring it makes negotiation harder as value rises.

Can it be amended later?
Yes, by agreement of the parties, and investors may require amendments to align it with round documents.